Foreword

Tina McKenzie,
Policy Chair

Is it one step forward and two steps back for small business confidence levels in the second quarter of 2024? Going from +5.5 points in Q1 to -10.8 in the following three months is certainly a setback, but it could well be a temporary setback on an otherwise more positive trajectory, not a return to the deep freeze experienced in the depths of the pandemic and cost-of-living crisis.

The confidence fall goes against the general tide of economic news over the period in question, with fairly robust GDP growth of 0.9% recorded in Q2, although inflation and interest rates did not fall as rapidly as had been predicted. Looking more closely at the data contained in the SBI underlines that the new Government – whose election happened bang in the middle of the period when this latest survey was undertaken – needs to take the needs and concerns of small businesses seriously, if the economic expansion and wealth creation we all want to see is to be nurtured.

Most striking is how the rosy expectations for revenue growth predicted by small firms in the previous iteration of this report failed to materialise. Back in Q1, nearly half (45.6%) of small businesses anticipated higher revenues in Q2; as it turned out, only a third of them (32.1%) enjoyed rising sales over the quarter. This bout of optimism has dissipated, and now the proportion expecting to see a rise in revenues in Q3 (34.7%) is far closer to the percentage of those bracing for a fall (30.1%).

With the summer now officially recognised as the coldest in the UK since 2015, it remains to be seen whether small firms’ sales figures for Q3 will have been boosted by the cornucopia of sporting events which took place, or whether they will turn out to be a damp squib. Gloomy talk from the new Government about fiscal black holes and the tough choices ahead may be adding to the downbeat atmosphere, with the deplorable outbreaks of rioting and violence in some areas of the UK not helping matters; while no one denies the tricky situation we find ourselves in, small businesses could be forgiven for wanting to hear a bit more positive news as they look towards the forthcoming Budget.

Small businesses are also looking with trepidation at the Government’s forthcoming plans to change employment, which could both increase risk around small businesses employing people, and the costs when they do. The rise of labour costs will hold back economic growth, and points to the possibility of a contraction in small business job numbers, which would be terrible news for firms, for staff, for local communities and the national economy.

The Employment Allowance, whose value has been significantly eroded by inflation, should be uprated at the autumn Budget, to restore the level of relief it provides to employers. When it was introduced, it covered the employer’s National Insurance contributions for the equivalent of four full-time staff on the National Living Wage, but in intervening years this has fallen to the equivalent of three full-time employees, making it that much harder for small firms to maintain and grow their headcounts.

All the major sectors saw a decline in their headline confidence level, be it relatively minor (the accommodation and food service sector went from -11.8 points in Q1 to -15.9 points in Q2, a 4.1-point fall) or more dramatic (manufacturing swung from a healthy +19.2 in Q1 to -12.7 points in Q2, a precipitous 31.9-point drop). The construction sector was the gloomiest overall in Q2, sitting at -20.7 points, almost twice as pessimistic as the -10.8 points recorded across all businesses. We are calling for targeted help for small housebuilders, such as reforming the consumer infrastructure levy, so small building firms can access the finance they need, to allow them to form an integral part of the Government’s ambitious housebuilding plans.

A slight easing in the proportion of small firms saying the cost of running their business was higher than this time a year ago is welcome, but going from 83.7% in Q1 to 80.4% in Q2 still means four in five small businesses are reporting a hit from inflation. Employment costs are the most commonly-cited major cause of this higher cost of doing business, jumping from second place in Q1 to the top spot in Q2. With employees’ rights much in the news of late, this placing is a reminder that small firms are already facing challenges when it comes to keeping people in jobs and finding skilled staff, and the last thing they need is more headaches around whether it is possible for them to employ a new staff member.

It’s clear that getting the small business community’s confidence back up has to be a political priority to fulfil economic goals. We hope the new Government takes heed of this in the run-up to its first major fiscal event. After a chilly and dismal summer, a bit of sunlight would be gratefully received.

Key findings

  • The FSB Small Business Index (SBI) decreased to -10.8 in Q2 2024. This is a marked contrast from the net optimism expressed in the previous quarter.
  • The fall in the headline index was broadly exhibited across the regions. Small business pessimism over the next three months was most prevalent in the North West.
  • The pessimism amongst small businesses over their growth ambitions for the coming months can be attributed to challenging conditions in the domestic UK economy, with more small firms reporting a decrease in revenue, compared to an increase in the past three months.
  • In the previous survey, the net balance of small businesses expecting revenue growth in Q2 2024 stood at 22.1%. However, over this period, the net balance of small businesses that reported revenue growth stood at -9.3%.
  • Exports continued to fall but at a slower pace from -8.2% in Q1 2024 to -0.4% in Q2 2024. Exports are expected to rise in Q3 2024.
  • The net balance of small businesses reporting an increase in operating costs was broadly similar to last quarter, at 75.6%. Labour costs have become the most cited source of changing business costs for the first time since Q4 2020.
  • Small business headcounts failed to record growth for the ninth consecutive quarter, recording net -1.4%, but they also expect to expand their staffing levels, on net, in the next three months to 2.4%.
  • The share of small businesses aspiring to grow over the next twelve months continued to rise to 54.1% in Q2. This represents the highest share of businesses hoping to expand for three years.
  • This improved sentiment towards growth contributed towards an increase in the share of small businesses applying for credit, up to 16.0% in Q2. The number of successful applicants among those who applied also rose by 13.9 percentage points in this quarter.
  • Despite this, small business perceptions of credit availability and affordability worsened in the quarter. The credit index remained negative, falling to -34.2.
  • The net balance of small businesses expecting to increase investment continues to be positive at 7.6%.
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